What you need to know about the American Tax System

Pay your taxes and...

To a newcomer, the American tax system may seem confusing. Many Americans themselves struggle with filling out their tax returns due to numerous nuances and complexities. That's why many prefer to leave it to the professionals. At American Butler, we have just the right people for that!

By contacting us, you can rest easy knowing your taxes are paid.

Types of taxes in the USA

The US tax system includes various types of taxes, such as federal, state, and local taxes. Each type of tax has its own purpose and is regulated by different laws. This guide will help you understand the key aspects of the US tax system.

• Federal Income Tax
  This is the main tax collected by the federal government. It is based on an individual's income and is calculated using progressive tax rates.
• State Income Tax
  Many states impose their own income taxes in addition to the federal tax. Rates and rules vary by state.
• Payroll Taxes
  These are taxes withheld from employees' wages to fund Social Security and Medicare programs.
• Corporate Tax
  Corporations in the USA are taxed on their profits. The rate varies depending on the corporation's income.
• Property Tax
  This tax is levied on real estate and sometimes on personal property. It is usually collected by local authorities.
• Sales Tax
  This is a consumption tax levied on the sale of goods and services. The rate varies by state and locality.
• Estate and Gift Tax
  This tax applies to the transfer of wealth through inheritance or gifts. Both the federal government and some states impose these taxes.

Key aspects of the system

Filing Requirements

• Individuals: US citizens, residents, and non-residents with income from US sources must file an annual tax return.
• Corporations: Companies must file an annual corporate tax return detailing their income, deductions, and tax liabilities.

Important Deadlines

• Individual Returns: Must be filed by April 15 each year.
• Corporate Returns: Must be filed by the 15th day of the fourth month after the end of the fiscal year.

Tip: Don't delay filing your return. Late penalties are 4.25%, and the tax amount will increase rapidly.

What is withheld in income tax?

Income tax in the USA consists of several parts:

• Federal Tax
  Calculated using special tables or progressive scales, depending on the state.
• Social Security Tax
  A fixed rate of 4.2% for individuals and 6.4% for companies. Self-employed individuals must pay the full amount, which is 10.6% of their annual income.
• State Tax
  Varies by state. Some states, like Florida, do not have state income tax.
• Medicare
  Contributions for the elderly and low-income individuals. The amount is the same for employees and companies — 1.45%. Freelancers pay 2.9% of their income.
• Local Taxes
  Regulated by the county, sometimes including city taxes.
• Dividends, Inheritance, Lottery or Casino Winnings, Tips, Gifts
  There are many more specific items.

Tip: To get additional special deductions, keep all purchase-related documents throughout the year. Contracts, receipts for work-related purchases, copies of education contracts for children or professional development, credit statements, and medical expense documents can all be useful when filling out your return.

5 important facts about paying taxes

1. 01.You Can Arrange with Your Employer: You can agree with your employer to withhold the percentage of your salary that you choose. When filling out the return, you simply indicate the already paid amount, and if it is more than necessary, the state will refund the difference.
2. 02.Three Parts of Taxes in America: Federal, state, and local taxes. Some states, like Florida, do not charge their citizens taxes, making places like Miami much cheaper.
3. 03.Non-payment Can Lead to Jail: Tax evasion can lead to imprisonment, with terms ranging from a few months to fifteen years.
4. 04.Personal Deductions and Subsidies: Every American has a personal standard deduction and several special subsidies.
5. 05.Keep All Receipts: Americans keep all receipts, contracts, and documents for at least a year.

Worth remembering

Who Pays Taxes in the USA

All US citizens and tax residents — those who spend more than 183 days in the country over three years. Most employers pay part of the tax for their employees and issue documents indicating the exact amount at the end of the year. If it is insufficient, the American sends a check to the tax service; if it is more than necessary, they get a refund.

Consequences of Not Paying Taxes

Tax debts lead to fines, and if ignored, the amount increases. Persistent evaders can go to jail, ruin their credit history, have their property seized, and their bank accounts frozen.

Who Collects Taxes

The US tax authority is called the IRS (Internal Revenue Service). Despite strict policies toward evaders, the IRS is always willing to accommodate those who owe the government.

When to Pay Taxes

Tax returns must be filed from January 1 to mid-April. In 2024, the last day is April 15.

Is All Salary Taxable?

No, not all. Some of it goes towards "personal exemption," the amount of which varies for different categories of citizens. There are also personal standard deductions and a list of deductions depending on the specific situation and family status.

Despite the lack of a single income tax rate, the amount that remains in the hands of each taxpayer is substantial.

Why is the Tax Consultant Profession so Popular in the USA?

Because the tax system is a massive 11,000-page document, with about 3% of the provisions revised annually. It is difficult to figure out all the details on your own, and you might miss the opportunity to legally return part of your income. That's why tax consultants in America are always in demand — their services are needed and affordable.